In ChoicePoint’s Wake, Lawyers Again Suit Up

Where there’s corporate trouble, shareholder lawsuits are sure to follow.

Law firms large and small from around the nation have jumped on information broker ChoicePoint Inc., where security breaches exposed thousands of personal data files to identity thieves. Nearly 20 class-action suits have been filed in the last month, many by shareholders.

That’s just part of a predictable pattern: When something goes wrong, both a company’s customers and owners are likely to sue.

“It’s a multi-ring circus,” said Stanford Law School professor and former SEC Commissioner Joseph Grundfest. “A company will get sued not only for a faulty product, but also if it’s so bad that the stock price declines.”

On Feb. 15, the day of the company disclosure about a recent breach, the share price stood at $44.88. Since then, it has fallen to as low as $37.65, a drop of 16%. On Thursday it closed unchanged at $39 on the New York Stock Exchange.

In their lawsuits against ChoicePoint, attorneys allege that executives presented a rosy picture of the company’s security even after they knew infiltrators had been able to pose as legitimate businesses to get Social Security numbers, birth dates and other confidential information from its databases.

“If the plaintiffs can show that management knew or should have known about the trouble but didn’t disclose it,” Grundfest said, “they can argue that stock was purchased at a price that was artificially inflated.”

In addition, many of the suits accuse company executives of reaping millions by improperly selling stock in the company before the news became public. According to Securities and Exchange Commission filings, Chief Executive Derek Smith earned about $12.4 million on stock sales from November through February, and President Douglas Curling took home a profit of about $4.1 million over the same period.

A ChoicePoint spokeswoman said the company had no comment on the suits. ChoicePoint has said the stock sales were planned in advance and had nothing to do with the identity-theft case.

The legal landscape for class-action securities lawsuits was set by a 1988 Supreme Court decision that said plaintiffs need not have been given false statements by a company in order to sue for fraud. It’s enough that they bought or sold stock in a company that deceived the market.

Early on, the race for a piece of the legal action in shareholder court actions was truly a race. The first law firm to file a legitimate suit in a case had dibs on being lead counsel and thus was likely to collect most of the legal fees if the suit was won.

“There were times that a suit got filed within an hour,” said attorney Gerald Silk with Bernstein Litowitz Berger & Grossman of New York, one of the firms representing WorldCom Inc. shareholders in ongoing suits.

The competition among law firms for shareholder suits was tamed somewhat by the Private Securities Litigation Reform Act, passed in 1995.

This led to some tiny law firms getting in over their heads on large cases or, Silk said, deals that put a large firm out front but provided the little firm with a cut of the legal fees for winning the race. Now the position of lead counsel and the fees that go with it if the case is won is awarded to the firm that snags the client with the largest number of shares.

For example, the largest shareholder in the WorldCom class-action suit is the New York State Common Retirement Fund. The fund chose Bernstein Litowitz and Philadelphia-based firm Barrack, Rodos & Bacine.

The law makes it likely that a client with ample resources -- and a huge amount of money at stake -- will be making the case for all shareholders.

Still, there is maneuvering. The 43-page suit filed by one of the most prominent of security fraud firms, Milberg Weiss Bershad & Schulman in New York, is a near copy of one filed by Chitwood & Harley in Atlanta, near where ChoicePoint is based.

Milberg Weiss, with 125 lawyers, asked for permission to duplicate the language because it does not have an Atlanta office, said Martin Chitwood, co-founder of the Georgia firm.

So, even if Milberg Weiss ends up being lead counsel, Chitwood & Harley -- with 16 lawyers -- might get invited to the dance.

“What the smaller firms are hoping is that they can be part of a coalition of law firms,” Grundfest said, “and thereby pick up a piece of the settlement if there is one.”

Those settlements can be huge. The largest since 1995 was, according to Stanford’s Securities Class Action Clearinghouse, in the 1999 Cendant Corp. case. It was settled for $3.5 billion.

The cut for the two law firms involved was $262 million.